Golden Company Makes 3,000 Units Per Year of a Part

question 49

Essay

Golden Company makes 3,000 units per year of a part called a "glup" for use in one of its products. Data concerning the unit production costs of glup follow:
$\begin{array} { | l | c | } \hline \text { Direct Materials } & \$ 35 \\\hline \text { Direct Labour } & \$ 10 \\\hline \text { Variable Manulacturing Overhead } & \$ 8 \\\hline \text { Fixed Manufacturing Overhead } & \$ 20 \\\hline \text { Total Manufacturing Cost per Unit } & \$ 73 \\\hline\end{array}$ An outside supplier has offered to sell Golden Company all the glups it requires. If Golden decided to discontinue making the glups, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labour is a variable cost.
Required:
A. Assume Golden Company has no alternative use for the facilities presently devoted to production of the glups. If the outside supplier offers to sell glups for $65 each, should Golden Company accept the offer? Should the centre be closed? Show calculations to support your answer.
B. Assume that Golden Company could use the facilities presently devoted to production of glups to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Golden Company should be willing to pay the outside supplier for glups?

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Definitions:

Demand Curves

A graphical representation showing the relationship between the price of a good and the quantity of that good consumers are willing to buy.

Indifference Map

A graph showing a set of indifference curves, illustrating combinations of goods or services among which a consumer is indifferent.

Total Utility

The full satisfaction experienced when consuming an exact aggregate quantity of a good or service.

Equal-Elevation Lines

Contour lines on a map representing points of equal elevation above a reference level, typically sea level.